South East Water is warning over “material uncertainty” regarding funding beyond July 2027 in its Group Annual Report and Financial Statements for the financial year ending 31^st March 2026.

The water company has reported a loss before tax of £45.4 million, up from a loss of £19.8 million for the previous financial year ending 31^st March 2025. South East Water has attributed the loss to a decline in operating profit.

Compared to financial year 2024-25, revenue rose to £351.8 million, an increase of 23.2 per cent, while capital expenditure increased by 21.9 per cent to £191.7 million. Cash generated from operations saw a decrease of 24.5 per cent down to £96.9 million.

During the year South East Water has agreed undertakings with Ofwat in respect of two separate investigations which include a redress package of £30.5 million to be funded wholly by the company’s shareholders.

Moody’s recent downgrade of South East Water’s financing subsidiary (SEWF) has caused the company to breach its licence condition obligation to maintain at least two investment-grade credit ratings. Ofwat has accepted a set of financial undertakings from ther to secure a return to

compliance with our licence condition in conjunction with the resilience undertakings mentioned above.

Major incidents during 2025-26 referenced in the report included a major supply outtage from 29 November to 12 December 2025 impacting some 24,000 customers who lost their drinking water supply in and around Tunbridge Wells – supplied from the Pembury Water Treatment Works (WTW).

The report also highlights the refusal by the Environment Agency of South East Water’s application to extend itd abstraction licence to March 2031 for the Greywell abstraction in the company’s western region which currently provides water for communities in the Greywell and Swains Hill area. An immediate cessation of abstraction at Greywell would cause a severe and immediate water shortage for thousands of local residents and businesses reliant on the source. The South East Water Board has therefore agreed to lodge a formal appeal to the Planning Inspectorate against the decision. The report states:

“By submitting an appeal, we are legally permitted to continue abstracting water from Greywell until the independent appeal process is determined. This ensures that taps keep running while we work on long-term solutions.

“Taking this formal route to appeal the EA’s decision is not something we decide lightly and we are sorry that we have not been able to resolve this matter without taking this action.”

Investment - “we will face difficult decisions in the years ahead”

According to the report, funding remains critical to the utility’s plans to tackle the urgent resilience and investment challenges it faces.

Commenting on the outcome of the company’s successful appeal to the Competition and Markets Authority on Ofwat’s PR24 decision on its AMP8 investment programme, the report says:

“Whilst the investment granted in this 5 year period is welcomed, we did not receive all the funding for water security and resilience improvements that we wanted. As a consequence we will face difficult decisions in the years ahead.”

On 28 May 2026 Moody’s downgraded the credit rating of South East Water (Finance) Ltd, the financing subsidiary of South East Water Ltd, moving it to sub-investment grade and putting the company in breach of its licence condition to maintain at least two investment-grade credit ratings. Moody’s cited the fallout from the high-profile and widespread supply outages in November/December 2025 and January 2026.

Following the credit rating downgrade, the company has agreed undertakings with Ofwat designed to return the company to compliance with its licence conditions.

Financial performance - “2025/26 has been a tough year operationally and financially”

The report says 2025/26 has been a tough year operationally and financially for the company. Operational challenges of the 2025 summer drought and the two major incidents in December 2025 and January 2025 resulted in significant direct emergency incident response additional costs. These totalled £54.7 million, including alternative water provision, extensive tankering operations, and direct customer compensation of £38.9 million under the Guaranteed Standards Scheme (GSS).

“This naturally has had a significant impact on the financial performance for the year,” the report says.

Underlying operating costs have also increased in the year as the company geared up to deliver the largest investment programme in its history. Operating profit was “therefore lower than the previous year” at £30.4 million compared to £54.5 million in 2024/25, despite a £66.3 million increase in revenue to £351.8 million.

The group has improved its gearing position in the last year. In May 2025, South East Water shareholders invested a further £200 million of equity, reducing gearing from 75.2 per cent at 31 March 2025 to 66.5 per cent at 31 March 2026.

Going Concern until July 2027 - but material uncertainties  may cast “significant doubt on the group’s and company’s ability to continue as a going concern”

The forecast cash flows over the 12 months to July 2027 have been considered in assessing South East Water’s liquidity runway. The group and company forecast base case does not indicate an additional requirement for financing in the going concern period, the report states, although “careful cash management will be required at the end of the period.”

According to the report, shortly after the going concern period, it will be necessary to secure new loan facilities in order to continue as a going concern.

The group finances its working capital requirements through cash generated from operations and committed facilities that can be called upon as required. As at 31 March 2026 the group had cash in hand of £18.8 million (2025: £36.1 million) and undrawn bank facilities of £75.0 million (2025: £56.0 million). Total borrowings at 31 March 2026 amounted to £1,346.7 million (2025: £1,395.4 million). Under the terms of its banking arrangements, the group has to comply with a number of financial covenants based on interest cover and gearing ratios, both on a retrospective and a prospective basis - all covenants were complied with for the year ended 31 March 2026. On the basis of the base case, which has been adjusted for known events in the period up to the signing of these accounts, the group and company expect to comply with covenants for the year ending 31 March 2027.

The report says the directors believe that it is appropriate to adopt the going concern basis of accounting in preparing the financial statements as they have “a reasonable expectation that the group and company will be able to meet their obligations as they fall due for a period of at least 12 months from the date of approval of the financial statements."

However, in making their assessment the directors have identified a number of material uncertainties which may cast “significant doubt on the group’s and company’s ability to continue as a going concern.”

The group and company cash flow forecasts on a base case indicate a need to secure new loan facilities shortly after the end of the going concern period -  12 months from the date of approval of the financial statements. In addition, the "severe but plausible scenari"  indicates a need to secure new loan facilities towards the end of the financial year. “Our ability to raise such debt is not wholly within our control,” the report states.

Commenting on liquidity, the report says that as part of the going concern assessment, the directors have considered the forecast cash flows over the 12 months to July 2027, the capital structure of the group and the financing needs for the period.

Under the base case the available liquidity will fund forecast operating cashflows, capital expenditure and interest payments until August 2027 with careful cash management towards the end of the going concern period.

However, shortly after the end of the going concern assessment period of 12 months from the date of approval of the financial statements South East Water will need to secure additional liquidity so that the group and company has adequate resources to continue to discharge its obligations as they fall due beyond the immediate assessment period.

The report cites a number of ways in which this could be achieved without impacting on the company’s statutory duties including measures to conserve cash, raising new debt or raising new equity – but cautions that “more severe scenarios would shorten the cash runway.”

The group and company are taking actions to conserve cash and have also engaged with lenders.

“Material uncertainties may cast significant doubt on the group’s and company’s ability to continue as a going concern”

However, the report warns:

“Although discussions with external lenders to provide funds to meet forecast projections and provide sufficient headroom are at an advanced stage and are expected to conclude over summer 2026, at the date of approval of these financial statements the financing has not been completed.

“If it is not possible to raise the additional liquidity, the group and therefore the company would not have sufficient liquidity to meet obligations as they fall due shortly after the going concern period.

“As the new loan facilities have not been legally committed at the date of approval of these financial statements and the commitment is not within the control of the directors, the risk that funding will not be received constitutes a material uncertainty that may cast significant doubt on the ability of the group and company to continue as a going concern.”

The directors have concluded that it is reasonable to assume that the group and company has adequate resources for the assessment period to continue operations and discharge its obligations as they fall due.

However, they warn that there are “material uncertainties that may cast significant doubt on the group’s and company’s ability to continue as a going concern over the assessment period.”

Click here to access the Group Annual Report and Financial Statements and related documents